If the borrower lets the insurance lapse, what action may the lender take?

If the borrower lets the insurance lapse, what action may the lender take?

• A. Place force-placed insurance on the home
• B. Reduce the loan amount
• C. Allow a grace period with no charge
• D. Waive payments for 3 months

Answer: (A)

When a borrower fails to maintain homeowners insurance on the property, the lender can protect its security by placing force-placed (lender-placed) insurance on the home. This means the lender buys a policy to cover the dwelling and adds the premium to the loan balance or to the escrow, ensuring there is still coverage even though the borrower’s policy lapsed. This action specifically preserves the collateral and reduces the lender’s risk, which is why it’s the appropriate remedy in this situation. Reducing the loan amount, offering a grace period with no charge, or waiving payments because of an insurance lapse do not align with how lenders protect their interest in the collateral.

When a borrower fails to maintain homeowners insurance on the property, the lender can protect its security by placing force-placed (lender-placed) insurance on the home. This means the lender buys a policy to cover the dwelling and adds the premium to the loan balance or to the escrow, ensuring there is still coverage even though the borrower’s policy lapsed. This action specifically preserves the collateral and reduces the lender’s risk, which is why it’s the appropriate remedy in this situation.

Reducing the loan amount, offering a grace period with no charge, or waiving payments because of an insurance lapse do not align with how lenders protect their interest in the collateral.